Tim Pawlenty’s big economic speech borrows the key tax piece of Paul Ryan’s budget: A collapse of the tax code into two flat rates, with a big corporate tax cut. Specifically, Pawlenty calls for a top marginal income tax of 25 percent, a bottom rate of 10 percent. “After that,” says Pawlenty, “the first $50,000 of income, or $100,000 for married couples, would be taxed at 10 percent. Everything above that would be taxed at 25 percent.” On corporate taxes, he wants a cut from 35 to 15 percent.
Again, very similar to what Ryan proposes. But here is how Pawlenty argues for it.
Between 1983 and 1987 — the Reagan recovery grew at 4.9%. Between 1996 and 1999 —- under President Bill Clinton and a Republican Congress. The economy grew at more than 4.7%. In each case millions of new jobs were created — incomes rose — and unemployment fell to historic lows. The same can happen again.
The thing is… both of those economic expansions followed on tax hikes . In 1982, Congress passed TERFA , a tax hike that ended up increasing revenue by 0.8 percent of GDP. The Clinton era expansion happened after the 1993 budget reconciliation raised marginal rates for higher incomes, although in 1997 we got a nice capital gains tax cut that slashed the rates from 28 percent to 20 percent and 15 percent to 10 percent.
Yes, Pawlenty is talking about broad strokes.
In the 1980s revenues increased by 99 percent. In the 1990s revenues climbed high enough to balance the budget. Five percent economic growth over 10 years would generate $3.8 trillion in new tax revenues. With that we would reduce projected deficits by 40 percent. All before we made a single budget cut.
But, look: The higher revenues came in after taxes were raised! Our experience since 1982 is that income tax cuts don’t actually increase revenue. See: the decade between 2000 and 2009, which Pawlenty does not mention here.